Seniors selecting reverse mortgages

Baby boomers aren't the only ones jumping on record low mortgage rates and high home values to finance their dreams.

Older homeowners dreaming of ways to stay in a home and draw on its value for living expenses, health care or home improvements are also getting in on the action, according to a national group of lenders that make what are known as reverse mortgages.

A reverse mortgage is a loan against a home that does not have to be paid back as long as the owner lives there. The older the borrower and the more expensive the home, the higher the loan. The loans are available only to those 62 and older.

The combination of great rates and surging house values is expected to nearly double applications for such loans this year, according to the National Reverse Mortgage Lenders Association.

The group cites federal housing statistics for the most popular reverse-mortgage product, the Home Equity Conversion Mortgage insured by the Federal Housing Administration. In fiscal 2001, about 7,800 homeowners took out Home Equity Conversion Mortgages. About 12,800 loans will be made this year if the pace continues.

According to the Department of Housing and Urban Development, 10,492 loans had been made as of July 31, more than the full-year record of 7,982 set in fiscal 1999.

In a reverse mortgage, a borrower can take the loan all at once, monthly or as needed, and in amounts that the borrower selects. The borrower or his estate must pay the money back plus interest and any other charges when he sells, permanently moves out or dies.

Because a borrower makes no monthly payments, the amount owed grows larger over time. That means the money left after selling a house and paying off the loan generally grows smaller.

The borrower must also continue to pay for property taxes, insurance and repairs. If not, the reverse loan becomes due and payable in full.

But a borrower can never owe more than a home's value at the time the loan is repaid. That's why older homeowners should consider reverse mortgages, said Peter Bell, president of the reverse-mortgage lenders group.

"The current conditions, of robust home values and low interest rates, enable borrowers to get a larger reverse mortgage than ever, which can translate into a bigger monthly check or larger line of credit," Bell said. "But should conditions change for the worse, seniors who have taken out a reverse mortgage will be protected and not see any reduction in their benefits from the reverse mortgage."

Bronwyn Belling, AARP's reverse-mortgage expert, agrees that "all the planets are aligning" to increase reverse-mortgage borrowing.

Not only are low interest rates and high house values driving the momentum, she said, but "retirement and pension funds are not performing," cutting financial resources for retirees.

Belling cautions that potential borrowers must still do the fairly complicated math to determine if a reverse mortgage is better than a home-equity loan, buying a less-expensive house, renting an apartment or moving to an assisted-living center.

A reverse mortgage would be expensive for those who sell a house quickly, in part because of high closing costs attached to the loan.